USDJPY vulnerable to debt ceiling worries
Democrats and Republicans remain in deadlock and President Obama has indicated he would accept a short-term increase in the debt ceiling to avoid default. However, this would provide only a short-term solution and it is unclear whether this would pass in the Senate. It appears difficult to envisage the US government defaulting on its debt, but ital so appears increasingly likely that markets need to react to the negative risks to promote a break of the stalemate on Capitol Hill. The JPY stands to benefit from an increase in debt ceiling stress as the October 17 soft deadline approaches. In the first instance because positioning remains very short yen, in contrast to CHF where our BNP Paribas Positioning Analysis suggests short positions have nowbeen cut to near flat and the EUR and GBP where positioning is now long. More fundamentally, a move to price in systemic stress related to the debt ceiling would benefit the yen thanks to Japan’s large externalinvestment position surplus, with Japan investor repatriation and a breakdown in current account surplus recycling the prime drivers of the yen’s reliable safe-haven status over time. Our base case expectation remains that the US fiscal crisis will be resolved with minimal lasting damage to US activity, allowing the USD to resume gains vs. the EUR, GBP, CHF and JPY into year-end. However, in the shorter-term, with financial sector stress increasingly looking like a necessary ingredient to forcing a negotiated solution in Washington, we think risks lie to the JPY upside. On Tuesday, US trade data will not be released due to the government shutdown
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BNP Paribas